The Closed System – Securities Regulation

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You can grab notes on other topic from here.

  1. Private Placement & Exemptions
  2. General Rule

General rule: no trading in security, unless you are registered. If it’s a distribution, without prospectus or proper reliance on private placement exemption

Policy: These are primarily meant to promote efficient capital markets (balanced w/ investor protection)

Two Requirements

  • Disclosure requirement – satisfied by prospectus, comprehensive disclosure document
  • Registration requirement – satisfied by underwriter selling securities

Tension b/w Investor Protection vs. Efficient Capital Markets

  • In third segment, see tension b/w investor protection (do a prospectus) and efficient capital markets (not every company can feasibly do a prospectus)
  • Allows sale of securities to public without time, trouble and expense of using a prospectus through private placement exemptions

The Concept of the Closed System

  • Securities will only be allowed to trade outside of this closed system if that trading is supported by adequate continuous disclosure.

o Trading within the closed market: Secondary market trading within closed market can only occur in reliance on an exemption. Exemption available only where purchasers do not need to know prospectus information o Trading outside the closed market:

  • (i) Prospectus Disclosure Followed by Continuous Disclosure. Need to provide adequate information to the investing public. Provide a prospectus, continuous disclosure.
  • (ii) Resale Restrictions: allow a person who purchased under an exemption to sell to members of the investing public as long as certain conditions concerning adequate disclosure are met. Purpose to protect investors by (1) access to information to those who care to gather it; (2) information for professional investment advice; (3) base of information to sophisticated investors whose trading causes market price to reflect underlying value. This requires a “seasoning period”: the period of time to allow a build-up of information.
  1. Advantages & Objectives of Private Placement *Exemptions found in NI 45-106 OR Rule 45-501

Adv: (1) Speed (No Prior Regulatory Review, like with prospectus, but still highly regulated!!); (2) Confidentiality (almost always more confidential than prospectus)

Policy Objectives of private placement exemption: All of them reflect a trade-off b/w investor protection and efficient capital markets – this is at least what they’re TRYING to do, even if there are inconsistencies

• No flexibility on these exemptions so be very careful

  1. Identity of Purchaser: Purchaser is so sufficiently sophisticated or wealthy that they do not need the protections of the securities act. E.g. Bank ^ you’ll protect yourself, hiring lawyers, accountants, advisors

All exemptions focus on :(1) identity of purchaser; (2) inherently safe securities; (3) Info already available; (4) another superior policy objectives

Inherently Safe Securities: Securities are so inherently safe that to need OSA to get involved is stupid (e.g. Canada Savings Bonds ^ not worried that if you buy these, govnt will default on obligation to pay)

  1. Information already Available: Information already available in a different form, so to require it again is stupid
  2. Another Superior Policy Objective: Some other policy objective trumping investor protection to some extent. E.g. Trying to promote investment in oil/gas, gold, electric cars, etc. ^ trying to do something that, from a policy perspective, is important enough to give exemption even if it detracts a bit from investor protection

You can grab notes on other topic from here.

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